================================================================================
________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

|X|     Quarterly  report  pursuant  to  Section 13  or 15(d) of  the Securities
        Exchange Act of 1934

                for the quarterly period ended September 30, 2001

                                       Or

|_|     Transition  report  pursuant  to  Section  13 or 15(d) of the Securities
        Exchange Act of 1934

                        Commission file number: 000-32925

                              AVATAR SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

             Texas                                         75-2796037
(State or other jurisdiction of             (IRS Employer Identification Number)
 incorporation or organization)

                5728 LBJ Freeway, Suite 270, Dallas, Texas 75240
              (Address of principal executive offices and zip code)


                                 (972) 720-1800
              (Registrant's telephone number, including area code)


                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the  registrant  filed all  documents  and reports  required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court. Yes [ ] No [ ]


                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:


             Class                                 Number of shares outstanding
                                                      at September 30, 2001


 Common stock,  $0.001 par value                             8,695,652


Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ ]

________________________________________________________________________________

================================================================================

<PAGE>

                                      INDEX

PART I.    FINANCIAL INFORMATION...............................................1

      Item 1.  Financial Statements............................................1

                Condensed Balance Sheets.......................................1

                Condensed Statements of Income.................................3

                Condensed  Statements of Cash Flows............................6

                Notes to the Financial Statements..............................8

      Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations....................................9

PART II.    OTHER INFORMATION.................................................12

      Item 1.  Legal Proceedings..............................................12

      Item 2.  Changes in Securities and Use of Proceeds......................12

      Item 3.  Defaults Upon Senior Securities................................12

      Item 4.  Submission of Matters to a Vote of Security Holders............12

      Item 5.  Other Information..............................................12

      Item 6.  Exhibits and Reports on Form 8-K...............................12

      Signatures..............................................................13




                                     - i -
<PAGE>
<TABLE>
<CAPTION>

                          PART I. FINANCIAL INFORMATION


ITEM 1.   FINANCIAL STATEMENTS

                              AVATAR SYSTEMS, INC.
                            CONDENSED BALANCE SHEETS



                                                           September 30, 2001     December 31, 2000
--------------------------------------------------------- -------------------   -------------------
                                                               (unaudited)
<S>                                                       <C>                   <C>
                                  ASSETS
Current assets:
 Cash and cash equivalents                                $           501,380   $           933,007
 Accounts receivable, net                                             230,142               126,618
 Inventory                                                             20,805                45,387
 Prepaid expenses                                                      38,532                 6,030
 Net assets of discontinued ecommerce subsidiary                       75,600                  --
 Deferred income taxes                                                 72,121                72,121
                                                          -------------------   -------------------
   Total current assets                                               938,580             1,183,163
                                                          -------------------   -------------------
Property and Equipment - at cost, net                                 138,436               130,204
Purchased Software, net                                               494,416               539,248
Software Development Costs, net                                     1,090,537               972,637

Other Assets                                                          231,949               557,087
                                                          -------------------   -------------------
   Total assets                                           $         2,893,918   $         3,382,339
                                                          ===================   ===================
                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Current maturities of long-term debt                     $            89,222   $           187,037
 Accounts payable                                                     199,742               145,053
 Accrued expense                                                       68,081               115,386
 Deferred revenues                                                    242,440               640,880
                                                          -------------------   -------------------
   Total current liabilities                                          599,485             1,088,356
                                                          -------------------   -------------------
Deferred income taxes                                                 128,246               112,797

Long-term debt, less current maturities:                                8,216                53,203
                                                          -------------------   -------------------
   Total liabilities                                                  735,947             1,254,356
                                                          -------------------   -------------------


</TABLE>

The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 1 -
<PAGE>
<TABLE>
<CAPTION>


                                                                  September 30, 2001     December 31, 2000
---------------------------------------------------------------- -------------------   -------------------
                                                                      (unaudited)
<S>                                                              <C>                   <C>
Stockholders' equity:
 Common stock, $0.001 par value; 30,000,000 shares authorized
  8,695,652 shares authorized, issued and outstanding                           8,696                 8,696
 Additional paid-in capital                                                 1,999,478             1,999,478
 Retained earnings                                                            149,797               119,809
                                                                  -------------------   -------------------
   Total stockholders' equity                                               2,157,971             2,127,983
                                                                  -------------------   -------------------
   Total liabilities and stockholders' equity                     $         2,893,918   $         3,382,339
                                                                  ===================   ===================

===========================================================================================================

</TABLE>










The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 2 -
<PAGE>
<TABLE>
<CAPTION>

                              AVATAR SYSTEMS, INC.
                         CONDENSED STATEMENTS OF INCOME

                                          Three Months Ended September 30,   Nine Months Ended September 30,
                                         ---------------------------------   -------------------------------
                                                 2001              2000             2001             2000
<S>                                      <C>               <C>               <C>              <C>
                                                    (unaudited)

Revenues:
 Software                                $       267,722   $        48,404   $      626,260   $       76,003
 Maintenance                                     269,426           190,422          778,775          601,345
 Professional services                            62,316           117,354          317,893          299,453
 Hardware                                         58,434            18,147          126,578          225,855
                                         ---------------   ---------------   --------------   --------------
    Net revenues                                 657,898           374,327        1,849,506        1,202,656

Cost of revenues:
 Software                                         44,761            19,112          105,443           38,002
 Maintenance                                      82,263            76,937          241,806          186,045
 Professional services                            20,772            26,730          109,289          155,329
 Hardware                                         48,889            18,025          107,514          196,911
                                         ---------------   ---------------   --------------   --------------
     Total cost of revenues                      196,685           140,804          564,052          576,287
                                         ---------------   ---------------   --------------   --------------
       Gross margin                              461,213           233,523        1,285,454          626,369

Operating expenses:
  Sales and marketing                             80,668            60,078          218,462          155,668
  General and administrative                     163,897           129,533          542,088          327,597
  Amortization of intangibles                     50,974            15,274          152,922           45,822
  Write off of acquisition costs                    --                --            323,539             --
                                         ---------------   ---------------   --------------   --------------
      Total operating expenses                   295,539           204,885        1,237,011          529,087
                                         ---------------   ---------------   --------------   --------------
        Income from operations                   165,674            28,638           48,443           97,282
                                         ---------------   ---------------   --------------   --------------
   Interest income                                 4,255            19,514           20,837           26,891
   Interest expense                                4,388             8,140           15,146           26,271
                                         ---------------   ---------------   --------------   --------------
        Income from continuing
        operations before income taxes           165,541            40,012           54,134           97,902
   Provision for income taxes                     56,284              --             18,406             --
                                         ---------------   ---------------   --------------   --------------
        Income from continuing
        operations                               109,257            40,012           35,728           97,902



The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 3 -
<PAGE>

                                          Three Months Ended September 30,   Nine Months Ended September 30,
                                         ---------------------------------   -------------------------------
                                                 2001              2000             2001             2000
                                                      (unaudited)

  Gain (Loss) from operation of
  discontinued ecommerce
  subsidiary (less applicable tax
  benefit (expense) of $24,774 and
  tax of $(2,999), respectively                  (48,091)             --              5,822             --


  Loss on disposal of discontinued
  ecommerce
  subsidiary including a provision of
  $14,200 for operating
  losses during phaseout (less
  applicable tax benefit of $6,976)              (11,561)             --            (11,561)            --
                                         ===============   ===============   ==============   ==============
         Net income                      $        49,605   $        40,012   $       29,989   $       97,902
                                         ===============   ===============   ==============   ==============
Net Income per Share Data
Income from continuing operations -
basic                                    $           .01   $          --     $         --     $         --
Income from continuing operations -
diluted                                  $           .01   $          --     $         --     $         --
                                         ===============   ===============   ==============   ==============
Gain (Loss) from discontinued
operation of ecommerce subsidiary -
basic                                    $          --     $          --     $         --     $         --
Gain (Loss) from discontinued
operation of ecommerce subsidiary -
diluted                                  $          --     $          --     $         --     $         --
                                         ===============   ===============   ==============   ==============
Loss on disposal of ecommerce
subsidiary - basic                       $          --     $          --     $         --     $         --
Loss on disposal of ecommerce
subsidiary - diluted                     $          --     $          --     $         --     $         --
                                         ===============   ===============   ==============   ==============
Net income per share - basic             $           .01   $          --     $         --     $         --
Net income per share - diluted           $           .01   $          --     $         --     $         --
                                         ---------------   ---------------   --------------   --------------
 Pro forma financial information
   Income before income taxes                       --              40,012             --             97,902
   Pro forma income tax expense                     --              13,604             --             33,287
                                         ---------------   ---------------   --------------   --------------
         Pro forma net income            $          --     $        26,408   $         --     $       64,615
                                         ===============   ===============   ==============   ==============



The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 4 -
<PAGE>

                                          Three Months Ended September 30,   Nine Months Ended September 30,
                                         ---------------------------------   -------------------------------
                                                 2001              2000             2001             2000
                                                      (unaudited)

Pro forma income per share
Basic                                    $          --     $           .00   $         --     $          .01
                                         ===============   ===============   ==============   ==============
Diluted                                  $          --     $           .00   $         --     $          .01
                                         ===============   ===============   ==============   ==============
Weighted average shares outstanding
Basic and diluted                              8,695,652         6,897,778        8,695,652        6,897,778
                                         ===============   ===============   ==============   ==============

</TABLE>












The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 5 -
<PAGE>
<TABLE>
<CAPTION>

                              AVATAR SYSTEMS, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS

                                                                            Nine Months Ended September 30,
                                                                         ------------------------------------
                                                                                  2001                2000
------------------------------------------------------------------------ ----------------    ----------------
                                                                            (unaudited)
<S>                                                                      <C>                 <C>

Cash flows from operating activities:
 Net income                                                              $         29,989    $         97,902
 Adjustments to reconcile net income to net cash provided by operating
 activities:
   Depreciation and amortization                                                  204,449              97,349
   Write off of acquisition costs                                                 323,539                --
   Gain from operation of discontinued ecommerce subsidiary                        (5,822)               --
   Loss on disposal of discontinued ecommerce subsidiary                           11,561                --
   Deferred income taxes                                                           18,406                --
   Cash provided by (used in) operating assets and liabilities:
     Accounts receivable                                                         (103,524)             58,159
     Inventory                                                                     24,582                --
     Prepaid and other current assets                                             (32,501)               --
     Accounts payable and accrued expenses                                          7,382              57,676
     Deferred revenues                                                           (398,440)             79,852
                                                                         ----------------    ----------------
      Net cash provided by operating activities                                    79,621             390,938

Cash flows from investing activities:
 Acquisition of fixed assets                                                      (58,532)            (10,071)
 Capitalized software development costs                                          (225,000)           (423,476)
 Note receivable from disposition of ecommerce subsidiary                         (75,600)               --
 Deposits                                                                          (9,314)               --
                                                                         ----------------    ----------------
      Net cash used in investing activities                                      (368,446)           (433,547)

Cash flows from financing activities:
 Capitalized offering costs                                                          --               (62,959)
 Sale of common stock                                                                --             1,473,185
 Payments on notes payable and capital lease obligations                         (142,802)           (134,516)
                                                                         ----------------    ----------------
      Net cash provided by (used in)  financing activities                       (142,802)          1,275,710


Net increase (decrease) in cash and cash equivalents                             (431,627)          1,233,101
Cash and cash equivalents at beginning of period                                  933,007             378,551
                                                                         ----------------    ----------------
Cash and cash equivalents at end of period                               $        501,380    $      1,611,652
                                                                         ================    ================






The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 6 -
<PAGE>

                                                                            Nine Months Ended September 30,
                                                                         ------------------------------------
                                                                                  2001                2000
------------------------------------------------------------------------ ----------------    ----------------
                                                                            (unaudited)

Supplemental disclosure of cash paid for:
 Interest                                                                $         15,277    $         26,271
======================================================================== ================    ================

</TABLE>











The  accompanying  notes  are an  integral  part of  these  condensed  financial
statements.

                                      - 7 -
<PAGE>

                              AVATAR SYSTEMS, INC.

                   NOTES TO THE CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)


1.    Basis of Presentation

         The  condensed  financial  statements  include  the  accounts of Avatar
Systems Inc. ("Avatar") and its wholly-owned subsidiary.  We have eliminated all
significant intercompany balances and transactions.

         We prepared the condensed  financial  statements in accordance with the
rules  and  regulations  of  the  Securities  and  Exchange  Commission  ("SEC")
applicable to interim financial  information.  Certain  information and footnote
disclosures  included  in  financial  statements  prepared  in  accordance  with
accounting  principles  generally  accepted in the United States of America have
been  omitted  in  these  interim  statements  pursuant  to such SEC  rules  and
regulations.  We recommend  that these interim  financial  statements be read in
conjunction with the audited financial  statements and related notes included in
our  Registration  Statement on Form 10-SB/A filed with the SEC. Interim results
are not necessarily indicative of the results to be expected for the full year.

         In  our  opinion,   the  condensed  financial  statements  include  all
adjustments  necessary to present  fairly the financial  position and results of
operations for each interim period shown.


2.    Recent Accounting Pronouncements

         In June 2001,  the Financial  Accounting  Standards  Board approved for
issuance  Statement  of  Financial  Accounting  Standards  No.  141 (SFAS  141),
Business Combinations. This standard eliminates the pooling method of accounting
for business combinations  initiated after June 30, 2001. In addition,  SFAS 141
addresses  the  accounting  for  intangible  assets and  goodwill  acquired in a
business  combination.  This  portion  of SFAS  141 is  effective  for  business
combinations  completed after June 30, 2001. The Company does no expect SFAS 141
to have a  material  effect on the  Company's  financial  position,  results  of
operations or cash flows.

         In June 2001,  the Financial  Accounting  Standards  Board approved for
issuance  Statement  of  financial  Accounting  Standards  No.  142 (SFAS  142),
Goodwill and Intangible  Assets,  which clarifies the accounting for impairments
to  purchased  goodwill  and  intangible  assets.  Under SFAS 142,  goodwill and
intangible assets with indefinitive lives will no longer be amortized,  but will
be  tested  for  impairment  annually  and also in the  event  of an  impairment
indicator. SFAS 142 is effective fiscal years beginning after December 15, 2001,
with early adoption  permitted for companies with fiscal years  beginning  after
March 15, 2001, if their first quarter financial  statements have not previously
been issued.  The Company does not expect SFAS 142 to have a material  effect on
the Company's financial position, results of operations or cash flows.

         In August 2001, the Financial  Accounting  Standards Board approved for
issuance  Statement  of  financial  Accounting  Standards  No.  144 (SFAS  144),
Accounting  for the Impairment or Disposal of Long-Lived  Assets.  This standard
addresses  financial  accounting and reporting for the impairment or disposal of
long-lived  assets.  This  standard  establishes  a single  framework,  based on
Statement of Financial Accounting  Standards No. 121 (SFAS 121),  Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived to Be Disposed Of, for
long-lived assets to be disposed of by sale and resolves certain  implementation
issues  related to SFAS 121.  SFAS 144 is effective  for fiscal years  beginning
after December 15, 2001. The Company does not expect SFAS 144 to have a material
effect on the Company's financial position, results of operations or cash flows.


3.    Write off of Acquisition Costs

         As a  result  of  an  inability  to  secure  financing,  the  Company's
standstill  agreement related to a proposed  acquisition  expired in April 2001,
and a deposit in the amount of $250,000 was forfeited.  Accordingly, the Company
recorded a charge of $323,539 to write-off  the $250,000  deposit and $73,539 in
related professional fees in the second quarter of 2001.



                                     - 8 -
<PAGE>

4.    Subsequent Event

         On October 17, 2001, the Company completed the sale of the stock of its
ecommerce  subsidiary,  Talon Global Solutions,  Inc. for an aggregate  purchase
price of $75,600. The Company received $20,000 in cash and a promissory note for
$55,600.  The note matures on December 1, 2002, with accrued  interest at 8% and
is payable in twelve  monthly  installments  of $4,852.  The company was sold to
Chad P. Statham, the president of Talon.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         You  should  read the  following  discussion  in  conjunction  with our
financial statements and related notes. Except for historical  information,  the
following discussion contains  forward-looking  statements within the meaning of
Section 27a of the  Securities  Act of 1933 and  Section  21e of the  Securities
Exchange  Act of  1934.  These  forward-looking  statements  involve  risks  and
uncertainties, including, among other things, statements about our gross margins
and operating  costs and expenses.  Our actual results may differ  significantly
from those projected in the forward-looking statements. Factors that might cause
future results to differ materially from those discussed in the  forward-looking
statements  include,  but are not limited to, those  discussed in  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
elsewhere  in this  document  as well as  other  information  set  forth  in our
Registration  Statement  on Form  10-SB/A  filed  November  5,  2001  and  other
documents we file from time to time with the Securities and Exchange Commission


Results of Operations

REVENUES

         Our net revenues  include four  components:  software  licensing  fees,
maintenance/recurring,  professional services and hardware. Our net revenues for
the third quarter ended September 30, 2001 increased 75.8% to $657,898  compared
with net revenues of $374,327 for the same period in 2000.  Net revenues for the
nine months ended  September 30, 2001 increased  53.8% to  $1,849,506,  compared
with net revenues of $1,202,656

         Software. Software sales for the third quarter of 2001 increased 453.1%
to $267,722  compared  with  software  sales of $48,404 for the third quarter of
2000.  Software  sales for the nine months ended  September  30, 2001  increased
724.0% to $626,260,  compared  with $76,003 from the same period last year.  The
increase in software  revenues is  primarily  from sales of the  Petroware  2000
software package, which was released in October 2000.

         Maintenance  and  other  recurring   revenue.   Maintenance  and  other
recurring  revenue  for the third  quarter of 2001  increased  41.5% to $269,426
compared with maintenance and other recurring  revenue of $190,422 for the third
quarter of 2000.  Maintenance  and other  recurring  revenue for the nine months
ended September 30, 2001 increased 29.5% to $778,775  compared with  maintenance
and other  recurring  revenue of $601,345  for the same  period  last year.  The
increase in maintenance and other recurring revenues is related to the Petroware
2000 software package, which was released in October of 2000.

         Professional  services.  Professional  service  revenue  for the  third
quarter of 2001 decreased 46.9% to $62,316,  compared with professional services
revenue of $117,354 for the third quarter of 2000.  Professional service revenue
for the nine  months  ended  September  30,  2001  increased  6.2% to  $317,893,
compared with $299,453 for the same period last year.


                                     - 9 -
<PAGE>

         Hardware. Hardware sales for the third quarter of 2001 increased 222.0%
to $58,434,  compared  with  hardware  sales of $18,147 for the third quarter of
2000. Hardware sales for the nine months ended September 30, 2001 declined 44.0%
to $126,578, compared with $225,855 from the same period last year. The decrease
in hardware  sales is due to a decline in customer  demand as well as a shift in
sales focus to the higher margin software sales.


COST OF REVENUES

         Our cost of revenues includes four components:  cost of software,  cost
of maintenance and other recurring,  cost of professional  services, and cost of
hardware  sales.  Our cost of revenues for the third  quarter of 2001  increased
39.7% to $196,685  compared  with cost of  revenues  of  $140,804  for the third
quarter of 2000.  Cost of revenues for the nine months ended  September 30, 2001
decreased  2.1% to $564,052  compared  with  $576,287 the same period last year.
Cost of revenues as a  percentage  of net  revenues  decreased  to 29.9% for the
three months ended  September  30, 2001 from 37.6% from the same period in 2000.
Cost of revenues as a percentage of net revenue  decreased to 30.5% for the nine
months ended  September  30, 2001,  compared with 47.9% for the same period last
year.

         Cost of software.  Cost of software  increased 134.2% to $44,761 in the
third  quarter  of 2001 from  $19,112  in the  third  quarter  of 2000.  Cost of
software  increased  177.5% to $105,443 in the nine months ended  September  30,
2001,  compared with $38,002 in the same period last year.  The increase in cost
of software is directly  related to the  increase in software  revenue.  Cost of
software as a  percentage  of the related  revenues  decreased  to 16.7% for the
third quarter of 2001  compared to 39.5% for the same period in 2000,  primarily
due to the increase in software  sales.  Cost of software as a percentage of the
related  revenues  increased  to 16.8% for the nine months ended  September  30,
2001, compared with 50.0% for the for the same period last year.

         Cost of maintenance and other recurring  revenues.  Cost of maintenance
and other recurring revenues increased 6.9% to $ 82,263 for the third quarter of
2001 from $76,937 for the third quarter of 2000.  Cost of maintenance  and other
recurring  revenues  increased  30.0%  to  $241,806  for the nine  months  ended
September 30, 2001,  compared with $186,045 for the same period last year.  This
increase was due to the  reallocation  of certain  programming  and  development
personnel from software development,  which is capitalized, to customer support.
Cost of maintenance and other recurring  revenues as a percentage of the related
revenue decreased to 30.5% for the third quarter 2001, compared to 40.4% for the
same period last year.  Cost of maintenance  and other  recurring  revenues as a
percentage of the related  revenue  remained stable at 31.0% for the nine months
ended September 30, 2001, compared with 30.9% for the same period last year. .

         Cost of professional services.  Cost of professional services decreased
22.3% to $20,772 for the three months ended  September  30, 2001,  compared with
$26,370 for the same period last year. Cost of professional  services  decreased
29.6% to $109,289 for the nine months ended September 30, 2001 from $155,329 for
the same period last year. Cost of professional  services as a percentage of the
related revenue increased to 33.3% in the third quarter 2001,  compared to 22.8%
for the same period last year. Cost of professional  services as a percentage of
the related  revenue  decreased to 34.4% for the nine months ended September 30,
2001,  compared with 51.9% for the same period last year.  The decreases in cost
were due to  reductions  in use of  outside  consultants  and the  reduction  in
percentages  of related  revenue were due to increased  demand for  professional
services.

         Hardware.  Cost of hardware  sold  increased  171.2% to $48,889 for the
three months ended September 30, 2001, compared with $18,025 for the same period
last year. Cost of hardware sold decreased 45.4% to $107,514 for the nine months
ended September 30, 2001,  compared with $196,911 for the same period last year.
Cost of hardware as a percentage of the related  revenue  decreased to 83.7% for
the three months ended  September  30,  2001,  compared  with 99.3% for the same
period  last year.  Cost of  hardware as a  percentage  of the  related  revenue
decreased to 84.9% for the three months ended September 30, 2001,  compared with
87.2% for the same period last year.


                                     - 10 -
<PAGE>

OPERATING EXPENSES

         Sales and  Marketing.  Our sales and  marketing  expenses for the third
quarter of 2001 increased 34.3% to $80,668,  compared with $60,078 for the third
quarter  of  2000.  Sales  and  marketing  expenses  for the nine  months  ended
September 30, 2001  increased  40.3% to $218,462,  compared with $155,668 in the
same  period  last year.  The  increase in expense for the three and nine months
ended  September 30, 2001 compared with the same periods last year was primarily
due to an increase in sales and  marketing  personnel  and  increased  sales and
marketing in our core markets.  Sales and marketing  expenses as a percentage of
net revenues  decreased to 12.3% for the three months ended  September 30, 2001,
compared with 16.0% for the same period last year. Sales and marketing  expenses
as a  percentage  of net  revenues  decreased to 11.8% for the nine months ended
September 30, 2001, compared with 12.9% for the same period last year.

         General and Administrative. Our general and administrative expenses for
the third quarter of 2001 increased 26.5% to $163,897, compared with general and
administrative  expenses of $129,533 for the third quarter of 2000.  General and
administrative  expenses  increased  65.5% to $542,088 for the nine months ended
September 30, 2001,  compared  with  $327,597 in the same period last year.  The
increase was due to increased  staffing and related costs to support our growth.
General and administrative expenses as a percentage of net revenues decreased to
24.9% in the third quarter of 2001,  compared with 34.6% in the third quarter of
2000.  General and  administrative  expenses  as a  percentage  of net  revenues
increased to 29.3% in the nine months ended  September  30, 2001,  compared with
27.2% in the same period last year.

         Interest  Income.  Interest  income was $4,255 in the third  quarter of
2001 compared to $19,514 in 2000. Interest income was $20,837 in the nine months
ended  September  30, 2001,  compared with $26,891 in the same period last year.
The decrease was primarily  due to smaller  balances  available for  investments
because of costs we  incurred  in our  reverse  merger and  deposits  we made on
contracts for potential acquisition candidates.

         Interest  Expense.  Interest expense was $4,388 in the third quarter of
2001  compared  to $8,140 in the same  period  last year.  Interest  expense was
$15,277 in the nine months ended  September  30, 2001,  compared with $26,271 in
the same period last year.

         Provision  for  Income  Taxes.  For the  three  and nine  months  ended
September  30,  2001 we  recorded  a tax  provision  on income  from  continuing
operations  of $56,284 and  $18,406,  respectively,  based on our pretax  income
using an effective tax rate of 34%, which is our anticipated  effective tax rate
for the fiscal year 2001.  The actual  effective  tax rate for the entire fiscal
year could vary substantially depending on actual results achieved.



                                     - 11 -
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

             None.


ITEM 2.   CHANGES IN SECURITIES

             None.


ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

             None.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

             None.


ITEM 5.   OTHER INFORMATION

         On October 17, 2001, the Company completed the sale of the stock of its
ecommerce  subsidiary,  Talon Global Solutions,  Inc. for an aggregate  purchase
price of $75,600. The Company received $20,000 in cash and a promissory note for
$55,600.  The note matures on December 1, 2002, with accrued  interest at 8% and
is payable in twelve  monthly  installments  of $4,852.  The company was sold to
Chad P. Statham, the president of Talon.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

       (a) Exhibits

               None.

       (b) Reports on Form 8-K

               None.



                                     - 12 -
<PAGE>

                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.




                                       AVATAR SYSTEMS, INC.


Dated: November 13, 2001               By:      /s/   ROBERT C. SHREVE, JR.
                                          --------------------------------------
                                          Robert C. Shreve, Jr., Chief Executive
                                          Officer and Chief Financial Officer














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